Emboldened by Republican control of the Arkansas Legislature for the first time in almost 140 years, the Arkansas Policy Foundation (APF) is renewing its call for tax cuts that could reduce state collections by $88.5 million.

When new and returning legislators are sworn into office in January, the Senate will have 21 Republicans and 14 Democrats, and the 100-member House will have 51 Republicans. Rep. Davy Carter, a Republican from Cabot and proponent of a broad review of Arkansas’ tax code, was recently elected as House Speaker for the 2013 General Assembly.

“The stage is set for a serious policy debate around a question advanced by the Policy Foundation since its 1995 founding: ‘How to cut taxes in Arkansas?’” noted a statement from Greg Kaza, executive director of the Arkansas Policy Foundation. “Fiscal policy in this new environment should focus on income, capital gains and grocery tax rates, and their potential effect on household budgets, job creation and state revenues.”

THE BEEBE BUDGET
Gov. Mike Beebe (D) released his budget proposal last week in which he called for a further reduction in the sales tax on groceries.

Beebe has reduced the tax incrementally in previous sessions and his proposal would lower the rate from its level of 1.5% to 1/8th of a percent in the next 2 years. The 1/8th percent figure is set by a constitutional provision that garners money exclusively for parks and tourism. Reducing the grocery tax by a penny equates to tax revenue reduction of about $48 million annually.

Beebe’s fiscal 2014 budget is $4.937 billion, and calls for an upward revision of 2.1% to the current forecast, which would bring in an expected $99.5 million in additional funding for the 2013 fiscal year.

The budget also includes a 3.7% increase in fiscal 2015, up $182.9 million. General revenues are primarily driven by individual and corporate income tax collections, sales taxes and other tax collections by the state.

‘IMMORAL’ TAX BRACKETS
One reason the APF calls for income tax rate changes is because the tax brackets set in 1971 have not been fully adjusted for inflation. The top bracket of 7% is for individual incomes above $25,000, and the bottom rate of 1% kicks in with individual income of $2,999.

“A 2008 Foundation analysis found retroactive CPI indexing of the 1971 tax hike would create a $132,607 income threshold for the 7% rate,” noted the APF statement.

Continuing, the APF article noted: “Middle-class households pay the top seven percent (7%) rate starting near $35,000, a threshold less than Arkansas median household income ($41,302) as reported by the federal government. This morally reprehensible policy should be a top priority of the new General Assembly when it meets in January 2013.”

Sen. Jake Files, R-Fort Smith, who has been tapped to chair the Senate Revenue & Tax committee, will be at the center of tax policy changes that reach the Senate floor. Files agreed that Arkansas should have “new inflation-adjusted tax brackets,” and added that to have a financially struggling single parent in the top bracket is “immoral.”

However, Files cautioned that tax policy changes require examination of budgetary impact.

“That (tax changes) will be raised, but a question that has to be there is, ‘How do you do this, and how do you do it responsibly?’” Files said Monday. “The challenge is going to be, with looming Medicaid cuts and with a majority of the budget spoken for, where do you find the money?”

THE APF PLAN
The APF argues there is room in the budget for further reduction to the sales tax on groceries and for income tax and capital gains tax reductions. The APF proposes the following specific cuts with estimates on revenue reduction:
• Individual income tax
Cut the top rate from 7% to 6.75%, with an estimated tax revenue reduction of $45 million

• Sales tax on groceries
Cut the tax from 1.5% to 1%, with an estimated tax revenue reduction of $25 million.

• Arkansas capital gains tax
Cut the tax rate by 10%, which would reduce tax revenue by $9.25 million
Cut the tax rate by 20%, which would reduce tax revenue by $18.5 million

“State revenues have exceeded forecasts: modest cuts in the income, grocery tax and capital gains rates can occur in 2013,” according to the APF proposal. “Further cuts depend on three scenarios: use of dynamic scoring, economic expansion at higher growth rates, and an ongoing review of state tax exemptions led by state Rep. Davy Carter, R-Cabot. Savings from the elimination of tax exemptions, in the third scenario could be applied to further reductions in tax rates.”

Arkansas ended fiscal 2011 with a $145.6 million surplus.

Files, who admitted that pressure is beginning to build on all sides of the tax policy issue, is hopeful for passage of a phased-in approach similar to that taken with the grocery tax.

“You don’t take a harsh scalpel-like approach and just cut and see what falls on the floor. … We should work toward a goal of strategic cuts” and then “work those in over time,” Files explained.

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